These trustees will be required to pay a minimum tax of 30 per cent on the taxable income of discretionary trusts received.
This measure is expected to raise about $4.5 billion over five years for the Federal Government.
Importantly, the reform will not apply to all trusts.
Fixed trusts, superannuation funds, charitable trusts, deceased estates and certain income categories - including primary production and testamentary trust income - are excluded.
The government estimates that more than 95 per cent of taxpayers will not be affected.
About half of discretionary trusts are not expected to face higher taxes in a given year, and small businesses will retain flexibility to adapt, including restructuring or revising how income is distributed.
The National Farmers Federation, Australia's peak farming body, has welcomes the reprieve for primary production, given the widespread use of trusts in agricultural businesses to support succession planning.
But a remaining concern is with landholding trusts, which are also prevalent.
Experts have warned that thousands of landholders and farmers maintaining multiple trusts for asset protection and succession planning - particularly landholding trusts - may still be caught by the changes.
This is because the primary production income exemption covers operational farming income, but trusts that simply hold farmland and generate rental or capital income may not qualify.
This major reform to the tax system will not be activated until July 1, 2028, but to ease the transition, expanded rollover relief will be introduced from July 1, 2027 for three years.
This will allow small businesses and other trust users to restructure into companies or fixed trusts without triggering capital gains tax or other liabilities.
Additional support will also be provided through the Australian Small Business and Family Enterprise Ombudsman.
The reform is intended to improve fairness and reduce tax advantages associated with income splitting.
Under the new policy, trustees - rather than beneficiaries - will be responsible for paying a minimum 30 per cent tax on a trust’s taxable income.
While beneficiaries will continue to report distributions in their personal tax returns, individuals will receive non‑refundable tax credits reflecting the tax already paid by the trustee.
Corporate beneficiaries, however, will not be eligible for such credits, closing off opportunities to use company structures to reduce or defer tax.
The reform responds to the rapid growth in discretionary trust use across Australia.
Since 2001-02, the number of such trusts has doubled, with about 840,000 now in existence.
In 2022-23 alone, discretionary trusts distributed more than $142 billion in income, much of it flowing to higher‑income households.
Treasury data indicates that the top 10 per cent of families receive the majority of this income and hold around 90 per cent of private trust wealth.
Officials argue that discretionary trusts, while being legitimate tools for asset protection and succession planning, have increasingly been used to minimise tax through ‘income splitting’.
This allows trustees to allocate income to beneficiaries on lower marginal tax rates, reducing overall tax payable - an option not available to wage and salary earners.
As a result, families using trusts have paid, on average, lower effective tax rates than those with similar incomes who do not.
The government says the 30 per cent minimum aligns trust taxation more closely with personal income tax rates, particularly the bracket applying to middle‑income workers earning between $45,001 and $135,000.
It is expected to improve both equity and long‑term sustainability in the tax system.
Overall, the measure is positioned as a targeted effort to curb tax avoidance strategies while preserving legitimate uses of trust structures within the economy.
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